The Unknown Grocer You Can Use to Measure Whole Foods' Growth

As investors here at The Motley Fool, we generally only talk about public companies, unless some big IPO is coming up or a private company affects the market in some way. Nevertheless, I was intrigued by a recent cover story in Forbes magazine that discussed the largest private companies in the United States. While we as investors cannot invest in these companies, we may purchase products from them, especially those that are primarily regional companies.

I was surprised that the sixth largest private company based on revenue was Publix Super Markets, a grocery store chain with more than 1,000 stores in the Southeast. Based on 2010 revenue, Publix would be the fourth largest supermarket, behind only Kroger (NYS: KR) , Safeway (NYS: SWY) , and SUPERVALU (NYS: SVU) . Even more surprising to me was that it had higher revenue than the next five largest public supermarkets combined:

What this means for investorsGroceries are one thing that people cannot live without, so there is money to be made in this low-margin business. The trick is to find the company you think will continue to do so.

Company

P/E

Profit Margin

Dividend Yield

Kroger

12.2

1.3%

1.9%

Safeway

14.0

1.2%

2.8%

SUPERVALU

61.6

0.1%

4.7%

Whole Foods Market

35.9

3.4%

0.8%

Casey's General Stores

21.4

1.6%

1.1%

Ruddick

17.8

2.6%

1.3%

Weis Markets

15.3

2.6%

3.0%

Source: FinViz.com.

According to my colleague Matt Thalman, the average net profit margin in the grocery industry is currently around 1.5%. This means that for every $100 in sales, the average grocery store makes $1.50. Of the seven largest grocery stores, only four exceed this benchmark, with Stock Advisor favorite Whole Foods Market leading the way at 3.4%. However, the three companies with lower margins, including barely profitable SUPERVALU, pay much higher dividends than Whole Foods. As you can see from the chart, Whole Foods actually has the lowest dividend of the group and is the second most expensive based on P/E, but is probably the most exciting grocery store chain out there.

Private companies are important, tooEven though you cannot directly invest in private companies, you can still use them as a general barometer of public companies to invest in. The fact that Publix, a regional grocer, is the sixth largest private company is a good indication of a sector to put some money into. People will always need groceries, and selecting the best supermarket stock can improve your portfolio's returns.

My choice here is Whole Foods Market, which I suggest you add to your watchlist today. There are many reasons that it is a favorite of many Fools; make it one of yours today!